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Tuesday, 31 January 2017

The U.S. Federal Reserve is expected to keep interest rates unchanged on Wednesday in its first policy decision since President Donald Trump took office, as the central bank awaits greater clarity on his economic policies.

Trump has promised a large infrastructure spending program, tax cuts, a rollback of regulations and a renegotiation of trade deals but has offered few details or a timeline for their roll out since his victory in the Nov. 8 election.

The central bank's latest policy decision is scheduled to be released at 2 p.m. EST (1900 GMT) on Wednesday at the conclusion of a two-day meeting. Fed Chair Janet Yellen is not due to hold a press conference.

The policy decision will come a week after Yellen underscored that the U.S. economy is near full employment and warned of a "nasty surprise" on inflation if the Fed is too slow with its rate hikes.

Economists polled by Reuters have all but ruled out a rate increase at this week's meeting. Investors next see an interest rate rise in June, according to Fed futures data compiled by the CME Group.

The Fed raised its benchmark interest rate at its last policy meeting in December, the second such move in a decade, to a target range between 0.50 percent and 0.75 percent. It forecast a further three rate increases this year.

WAIT-AND-SEE MODE

Despite encouraging U.S. economic data, Fed policymakers are currently hampered in assessing how quickly inflation might rise until they have more information on Trump's economic plans.

"At the moment there's incredible uncertainty surrounding fiscal policy and the potential for stimulus and the composition of that," said Paul Ashworth, an economist at Capital Economics. "The Fed can't react until it knows what to react to."

With the U.S. economy already bumping up against full employment, Trump's promises on fiscal stimulus and tax reform could quickly spur higher inflation as would imposing tariffs on Mexican imports.

That may cause Fed policymakers to raise rates faster.

Other policies, such as an immigration crackdown, go against what the Fed argues the U.S. economy needs to grow over the long term.

U.S. stocks fell on Monday after Trump curtailed travel and immigration to the United States from seven predominantly Muslim countries.

The S&P 500 index .SPX is still up roughly 6 percent since Trump's victory and the robustness of the domestic economy makes the United States increasingly divergent from Japan, the euro zone and Britain, none of which are expected to raise rates anytime soon.

The Fed will likely only make minor tweaks in its policy statement on Wednesday to reflect a string of positive recent economic reports.

"Changes to the ... statement should be mostly upbeat," Roberto Perli, an economist at Cornerstone Macro LLC, said in a note to clients.

The U.S. unemployment rate is 4.7 percent and business investment has improved, despite a slowdown in fourth-quarter economic growth caused mostly by a widening trade deficit. Consumer spending, which accounts for more than two-thirds of the nation's economic activity, rose solidly in December, according to Commerce Department data released on Monday.

In the same report, the Fed's closely-watched inflation gauge also edged up to 1.7 percent.

Britain's pound fell on Monday, setting it on course for its first three-day fall against the dollar of the year and putting it on the back foot ahead of Thursday's first Bank of England meeting of 2017.

The BoE is widely expected to revise up its short-term growth and inflation forecasts following reassuring recent UK data, but the uncertainty surrounding soon-to-start Brexit negotiations is expected to keep it cautious.

Sterling was quickly down 0.3 percent against the dollar at $1.2510 in London, having slipped off a five-week high at the end of last week.

It dipped similar amounts against its other major FX peers, with the euro worth 85.39 pence and the pound fetching 143.64 yen, in what was its first fall against the safe-haven Japanese currency in five sessions.

Crédit Agricole FX Strategist Manuel Oliveri said his team expected sterling to struggle following a recent mini-rally, with Brexit uncertainty to remain the main driver and data also likely to weaken.

"We don't think the (BoE) inflation report will be a big shock," he said. "It may sound a bit more hawkish but it still remains cautious."

"A lot more is needed to push the needle" for the bank to start considering a move in interest rates, he added.

The pound has fallen roughly 19 percent against the dollar since June's Brexit vote, but for the last few months it has been in a relatively restrained range of between $1.20 and $1.28 and 84 pence and 88 pence per euro.

For companies it continues to have mixed effects.

Denmark's Novo Nordisk, the world's top maker of diabetes drugs, said on Monday it would invest 115 million pounds ($145 million) in a new British research centre.

Foreign exchange trading out of London rose 3 percent in October 2016 compared with a year earlier, but at $2.18 trillion a day it was still down from the equivalent six months earlier, a semi-annual survey by the Bank of England showed on Tuesday.

The survey also showed that the vigorous trading in the pound since Britain's surprise decision last June to leave the European Union drove an 8 percent rise in trading of the currency against the dollar, to an average of $281 billion a day.

Overall volumes were depressed by a continuing fall off in spot currency trading, the report's data showed.

Monday, 30 January 2017

The dollar fell on Monday, nudged off a one-week high against a basket of currencies after Treasury yields declined on data showing the U.S. economy growing more slowly than expected.

Underlying concerns over U.S. President's Donald Trump's protectionist trade stance also cut short the dollar's stay at the one-week peak, with a temporary travel ban on people from seven Muslim-majority countries imposed at the weekend adding another layer of uncertainty.

The dollar was down 0.6 percent at 114.410 yen after it rise on Friday to 115.380, its highest since Jan. 20.

The euro added to Friday's modest gains and was last 0.3 percent higher at $1.0733.

"The weak U.S. GDP is doing the dollar no favours. But it also takes courage to keep buying the dollar considering what Trump has said about the kind of a currency policy he could pursue," said Daisuke Karakama, market economist at Mizuho Bank in Tokyo.

The proposal was seen putting pressure on U.S. trade partners to accept a weaker dollar. Trump has hinted that he does not want a strong dollar because it makes U.S. exports less competitive.

"Previously, the unspoken rule was that a government did not bind down the currency policies of another, but such norms now look to be overridden," Karakama at Mizuho Bank said.

Data on Friday showed U.S. gross domestic product grew at a 1.9 percent annualised pace in the final three months of 2016, compared with a 3.5 percent rate in the third quarter. Analysts polled by Reuters had forecast GDP growth of 2.2 percent.

"The correlation between the dollar and U.S. yields still remains relatively strong, and it is being weighed down after the lacklustre GDP release," said Junichi Ishikawa, senior FX strategist at IG Securities in Tokyo.

The dollar has been volatile since Donald Trump's inauguration on Jan. 20. Market focus has been caught between Trump's protectionist slant, seen as negative for the greenback, and hopes for fiscal stimulus under the new president, considered a positive for the currency.

The dollar index against a basket of major currencies fell to a seven-week low of 99.793 on Thursday before clawing back to a one-week high of 100.82 a day later. The index was down 0.3 percent at 100.320 on Monday.

Apart from Trump, market focus was on monetary policy, with the Bank of Japan, the Federal Reserve and the Bank of England holding policy meetings this week.

"None of the central bank meetings is expected to result in any change in policy, but there could be a change in nuance that affects currencies," wrote Marshall Gittler, head of investment research at FXPrimus.

"Meanwhile, the surge of executive orders and Twitter comments coming out of the White House shows no signs of slowing down, and with them the gyrations in the U.S. bond market and therefore the dollar are likely to continue."

The pound was up 0.4 percent at $1.2594 against a broadly weaker dollar, paring Friday's losses.

The Australian dollar was 0.1 percent higher at $0.7556 and the New Zealand dollar was also 0.1 percent firmer, at $0.7272 .

Liquidity in Asia was lower than usual with financial markets in Hong Kong, China and Singapore shut for the Lunar New Year holidays.

The dollar rose against the yen late on Friday, extending a broad trend that has been in place since U.S. President Donald Trump's election in November on expectations of more pro-growth policies to bolster an economy that has improved but sputtered at times.

The greenback has climbed for two straight days, pulling it back from seven-week lows against a basket of currencies on the view that it would gain from a rise in border tariffs, tax reform and future spending.

"Donald Trump's ambitious fiscal plans point to stronger growth in the coming quarters," said Fawad Razaqzada, market analyst at Forex.com in London.

"He has hit the ground running, making a number of executive orders in his first week as the president. So hopes that he will boost economic growth are alive and this may keep the dollar bid," he added.

"The heavily abstracted threat of a trade war is unlikely to shake investor confidence until the reality arrives," said Karl Schamotta, director of global product and market strategy at Cambridge Global Payments in Toronto.

The dollar briefly wobbled after the U.S. Commerce Department's first estimate of fourth-quarter gross domestic product showed that growth slowed more than expected, to a 1.9 percent annual rate due to weak exports. The market was expecting growth of 2.2 percent.

The economy grew only 1.6 percent in 2016, the weakest pace since 2011.

Dennis de Jong, managing director at online currency broker UFX.com in Limassol, Cyprus, described Friday's U.S. GDP number as "solid but not spectacular," and said it should keep the Federal Reserve on track to raise interest rates multiple times this year.

The 4 percent fall in the dollar in the three weeks from Jan. 3 reflected doubts about how the new administration’s policy mix would play out for the currency, particularly after both Trump and Treasury secretary nominee Steven Mnuchin hinted at concerns over the dollar's strength.

But many analysts cast it simply as a necessary adjustment to market positioning before the dollar can deliver on what were widespread expectations of a strong rally in 2017.

In late trading, the dollar was up 0.5 percent against the yen, to 115.11 yen JPY=, after touching a one-week high of 115.37 yen.

The dollar also rose against sterling, which fell 0.3 percent to $1.2559.

The euro, however, gained 0.1 percent against the dollar to $1.0693 EUR=, leaving the dollar index at 100.60 .DXY, or 0.2 percent higher on the day.

Sunday, 29 January 2017

Basic Trading Concepts Defined

Increased
volatility leads many traders to seeing an increase in trading opportunities.
The huge market swings trigger thoughts of monumental upside, but also for
potential loss especially if traders do not take the necessary precautions.
During times of volatility, traders need to adjust their strategy to compensate
for erratic market. When trading during these market conditions, traders should
follow the rules below.

1. Be More
Selective Before Placing Trades

Wanting to
take advantage of all the trading opportunities that present themselves in
volatile markets, traders are tempted to place an increase number of trades.
This temptation should be avoided. It is important to remember that in volatile
times, losses are likely to be big. Before placing a trading, assess risk tolerance levels. Determine
the level of risk that is acceptable for the trader both psychologically and
financially before placing any trades.

2. Use Less
Leverage

During high
market volatility, losses can be traumatic. With the average trading range
increased in volatile times traders should be considering how leverage will
affect trades. At a one percent or even a half percent margin, investors should
be mindful of how much leverage or even the size position being traded can
affect their portfolio. In normal market conditions, placing a 2 lot position
is fine when you are looking to make about 50-100 pips. During a more volatile
time, when the potential loss is 100-200 pips, it stops being an effective risk
to reward ratio. To compensate traders should look to taking on smaller trading
positions, in this case only one lot as opposed to the average 2 lot position.

3. Trade with
More Discipline

Traders
should always follow their predetermined trading strategy regardless of market
condition. During volatile markets, this is even more important to use that
same level of restraint. Traders must adhere to any set stops, contingency
plans or risk management benchmarks without hesitation. This will help to
define how much risk is taken should price action be uncontrollable. Without
this level of discipline and self control losses can be great.

4. Tighten Stops

Many
traders are hesitant to use tighter stops in volatile markets because they see
the large swings increasing the likelihood that the position will be taken out.
Having tighter stops can also provide great risk managers in times of extreme
volatility. For example, on a EURUSD trade, rather than setting an 80 pip stop
to protect your position, consider placing a 50-60 pip stop. This will insure
the protection of your currency position and if the stop is broken, there is a
high likelihood that the trend will continue lower and the stop took you out
before you could potentially lose more money.

The width
of the stop being set does depend on the currency pair being trading as some
pairs have wider ranges. In a Yen cross like the GBPJPY or AUDJPY, traders may
be more likely to have wider stops as their average daily range is 50% more
than that of the EUR/USD. With that said, stops during volatile market
conditions should not as wide as before. Instead of a stop 100 pips below
entry, traders may consider a 25 pip reduction and have a 75 pip stop. Below is
a chart showing the EURUSD and the GBPJPY on the same very volatile day in the
forex market. The EURUSD had an impressive range of nearly 600 pips! The GBPJPY
far dominated though with nearly a 2000 pip trading range.

5. Be Prepared

It also
helps a trader to know what is causing the current spate of volatility in the
markets in order to be prepared for the unexpected. As such, an investor can
accommodate their strategy to the market environment and not just the currency
pair being traded. The first of these considerations is accounting for emotions
in a market: is fear currently driving the market lower? Or is it buyer's mania
that is keeping the bullish tone alive? Traders' overreaction and emotion tend
to push markets to overextended targets. This fact alone creates volatility
through simple supply and demand.

Volatility
can also, and more than likely will, be sparked by economic events. In this
instance, market participants may interpret fundamental data differently and
not as cut and dry as the more novice trader. A perfect example of this is
usually monthly manufacturing reports that are released in pretty much all industrial
economies. The classic scenario has the market honed in on a particular number
for the month. However, traders young and old will sometimes wonder why the
market sold off if manufacturing showed positive growth. The answer is simple.
The market had a different interpretation and positions were violently reshaped
and shifted. These tend to create great opportunities for some and horrible memories
for others. Below is a historic hourly chart of the EUR/USD during ISM
Manufacturing for October 1, 2008. Here we can see the huge price gap that
occurred due to market volatility as well as the resulting trend.

Panic and
erratic momentum can additionally be found in certain market environments. Not
to be confused with fear or greed, panic selling and buying can create very
choppy and relatively untradeable markets. These conditions will lead some to
flip flop their positions while leaving others gaping at the fact that the
position was right, only to be stopped out prematurely. These two common
examples will create further panic and volatility as traders abandon their own
individual strategy for the possibility of instant profits or stoppage revenge.
As a result, a vicious cycle of volatility ensues until a definitive market
direction can be established.

The simple
rules above, and a task of getting to know the current trading environment, can
empower every trader through the ranks. Although some relate volatility with
difficult and untouchable markets, opportunities continue to remain abound in
these less than attractive conditions to those focused and fortunate.

By
following these five simple steps, trading in volatile market conditions should
be a little simpler. Don't forget to adjust leverage based on volatility,
follow your trading plan, tighten your stops and know why you are getting into
a trade before you place it.

Friday, 27 January 2017

Asian shares were fractionally lower on Friday in holiday-thinned trade but were on track for a solid advance this week, while oil and the dollar retained gains in the wake of strong U.S. corporate earnings.

European markets were heading for a quiet start, with financial spreadbetter CMC Markets predicting Britain's FTSE 100 would open flat and France's CAC 40 would start the day down 0.1 percent.

It forecast that Germany's DAX, which on Thursday closed at its highest level since May 2015, would open 0.2 percent lower.

MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.1 percent, with several markets closed for the Lunar New Year holiday. It was on track to end the week up 1.85 percent.

Japan's Nikkei closed up 0.3 percent, after data showed December core consumer prices fell at the slowest annual pace in nearly a year, suggesting inflation should pick up in coming months.

The Nikkei posted a 1.7 percent gain for the week.

Markets in China were shut for the Lunar New Year holiday, and will reopen on Feb. 3. Hong Kong shares barely moved on Friday, when the market closed at midday.

Overnight on Wall Street, all three major indices hit life-time intraday highs, with the Dow Jones Industrial Average also rising 0.2 percent to close at a record high after breaching 20,000 on Wednesday.

The S&P 500 and the Nasdaq edged back down to end the day a touch below Wednesday's record close.

"U.S. stock markets tend to be a sentiment leader for world markets and in what’s become a familiar pattern over recent years, the quarterly profit reporting season is supporting that sentiment," Ric Spooner, chief market analyst at CMC Markets in Sydney, wrote in a note.

"Around a third of companies in the S&P 500 index have now reported and overall earnings are ahead of consensus forecasts," he said.

The MSCI World index was steady on Friday. It hit a record intraday high on Thursday before ending the day about 0.1 percent below its previous close.

European shares climbed to a one-year high on Thursday, lifted by Johnson & Johnson's $30 billion deal to buy Swiss biotech firm Actelion.

The Mexican peso tumbled about 0.8 percent against the dollar on Friday after the White House said the U.S. might impose a 20 percent tax on Mexican imports to pay for a border wall between the two countries.

That followed Mexican President Enrique Pena Nieto's decision to pull out of a meeting in Washington after his U.S. counterpart Donald Trump tweeted that it would be better for the Mexican leader not to visit if his country wouldn't pay for the wall.

Trump’s office later walked back the idea of a tax, saying that was "one way" of making Mexico pay.

The dollar index, which tracks the greenback against its trade-weighted rivals, was up 0.35 percent at 100.73 on Friday. On Thursday, it touched a seven-week low but closed up 0.35 percent.

The index is set to end the week flat, after market jitters following Trump's protectionist inaugural speech weighed on the dollar early in the week.

But since then, Trump's actions show "continuity from his campaign days, so the markets expect him to go ahead with the fiscal stimulus as well," said Minori Uchida, chief FX analyst at Bank of Tokyo Mitsubishi UFJ.

The prospect of higher U.S. inflation boosted U.S. 10-year Treasury yields to 2.5158 percent on Friday. On Thursday, they hit 2.555 percent, their highest level this year, before settling back down at 2.508.

The euro slid 0.15 percent to $1.06655 on Friday, adding to its 0.6 percent loss from Thursday.

In commodities, oil retained its gains from Thursday that were driven by the resurgence of risk appetites. But a jump in U.S. inventories this week capped its advance.

U.S. crude was little changed at $53.78 a barrel, after Thursday's near 2 percent surge. It is poised for a 2.6 percent weekly increase.

Global benchmark Brent eased 0.1 percent to $56.19, heading for a rise of 1.3 percent for the week.

Sterling slipped from a six-week high against the dollar on Thursday as investors booked profits after a rally that saw the pound climb almost 5 percent in just 10 days.

The pound had initially risen on data showing Britain's economy maintained its momentum in the final three months of 2016, again defying expectations that June's vote for Brexit would rapidly take a toll on growth.

But it quickly gave up those gains and, after touching a high of $1.2674, was down 0.1 percent on the day by 1100 GMT at $1.2615. That still left sterling on track for its best fortnightly performance against the dollar in 10 months.

"Sterling has had quite a good run over the past week and there now seems to be a bit of a short squeeze," said Societe Generale currency strategist Alvin Tan.

Against the euro, sterling reached a three-week high of 84.71 pence after the data before easing back to trade flat on the day at 85.03 pence.

The focus since Britain voted to leave the European Union has been how that departure plays out - whether it will be a "hard" exit in which Britain leaves the single market or a "softer" one being the key question. Now it appears that investors are turning to fundamentals.

Analysts said that was partly because with more clarity on Brexit, investors could shift their attention from politics.

Prime Minister Theresa May announced last week that Britain is indeed to leave the single market, although she shied away from saying that constituted a "hard Brexit". The pound put in its best daily performance since the 1990s in response. And on Wednesday, May said she would set out her government's plans for Brexit in a white paper.

"These developments have improved sentiment in sterling again, after a very poor showing at the beginning of the year," Tan said .

Investors are looking ahead to the first Bank of England "Super Thursday" of the year next week, when the BoE will present its quarterly inflation report along with its decision on monetary policy.

Inflation has accelerated as sterling has shed 12 percent since the Brexit vote on a trade-weighted basis, leading to market talk that the BoE will take a more hawkish tilt and even signal that it is moving closer to raising rates from their current record low of 0.25 percent.

But a Reuters poll on Monday found most economists expect the BoE to leave its rates and other stimulus measures unchanged at least until 2019, even though it is likely to raise its 2017 growth forecast again next week

Traders will also be watching the results of a meeting between U.S. President Donald Trump and Theresa May on Friday, with trade expected to dominate discussions.

"Sterling will focus on news headlines around PM May’s U.S. visit which, at face value at least, should be positive for the currency," said Commonwealth Bank currency strategist Adam Myers.

Thursday, 26 January 2017

Asian stocks rose to 3-1/2-month highs on Thursday, cheered by the Dow Jones Industrial Average breaching the 20,000-level for the first time, though concerns about U.S. President Donald Trump's protectionist stance kept the dollar on the defensive.

Spreadbetters forecast European stocks would follow, seeing a higher open for Britain's FTSE, Germany's DAX and France's CAC

"Today's excitement mainly comes from strong U.S. stocks overnight, but people are also positive about Japanese companies' earnings especially machinery manufacturers," said Takuya Takahashi, a strategist at Daiwa Securities in Tokyo.

The Dow closed atop the 20,000 mark for the first time overnight as solid earnings and optimism over Trump's pro-growth initiatives revitalised a post-election rally.

Safe-haven U.S. Treasuries were duly sold as risk aversion ebbed and the benchmark 10-year note yield rose to a four-week high on Wednesday. Subdued investor demand at a five-year auction also hurt Treasuries.

The dollar, which often draws support from higher Treasury yields, failed to follow suit. An index tracking the greenback against a basket of major currencies slid to a seven-week low of 99.793 on Thursday.

Unlike equities, the currency markets focused more on Trump's trade protectionism and the negative impact it could have on the dollar.

"The problem that the greenback is having right now is two fold - first Trump has been talking down the currency and second, his policies make foreign investors nervous," wrote Kathy Lien, managing director of FX strategy for BK Asset Management.

"Until the market comes to terms with the risk/benefits of Trump policy, the dollar may have a tough time mimicking the one way moves in stocks and bonds."

The dollar was little changed at 113.375 yen after losing 0.5 percent overnight.

It had soared to a 10-month high of 118.660 in mid-December at the apex of the dollar-boosting Trump trade, when the market focus was on bets of more fiscal stimulus and reflationary measures under the new administration.

The euro was steady at $1.0754 after gaining 0.2 percent the previous day. The common currency had risen to a 1-1/2-month high of $1.0775 on Tuesday against the struggling dollar.

The pound extended its overnight rally and touched a six-week high of $1.2663 .

Sterling has drawn its latest boost from expectations that British Prime Minister Theresa May's upcoming meeting with Trump would pave the way for a rapid U.S. trade deal, which may offset some of the damage from its looming divorce with the European Union.

In commodities, crude oil prices bounced amid the dollar's weakening after falling the previous day on data showing a build in U.S. crude inventories.

U.S. crude was up 0.8 percent at $53.18 a barrel after losing the same amount the previous day. Brent added 0.8 percent to $55.53 a barrel.

A weaker greenback tends to favour non-U.S. buyers of dollar-denominated commodities like crude.

Gold was on track for a third straight day of losses as the risk-on mood in the global markets reduced demand for the precious metal.

Spot gold was down 0.15 percent at $1,197.96 an ounce, pulled back from a two-month high of $1,219.59 scaled on Tuesday.

World stocks hit a 19-month high on Wednesday, lifted by strong Japanese trade data, stellar European company earnings and expectations that U.S. President Donald Trump will press ahead with a large fiscal spending package.

The refocus on Trump's policies aimed at reflating the U.S. economy didn't extend as much to bond and currency markets, where U.S. yields only inched up and the dollar fell across the board, particularly against a resurgent British pound.

U.S. futures pointed to a higher open on Wall Street On Tuesday the S&P 500 .SPX and Nasdaq .NDX both rose to fresh record highs and the Dow Jones Industrials .DJI came within 51 points of the elusive 20,000 mark.

"It's time dust off those Dow 20k hats again, because the Trump rally is well and truly back on," said Neil Wilson, senior market analyst at ETX Capital.

The post-election rally has tempered in recent days as investors focused on the White House's trade protection pronouncements.

Spanish bank Santander was among the big gainers in Europe, its 4 percent rise in 2016 net profit giving its share price a similar boost and leading the continent-wide rally in bank stocks.

Japan's Nikkei .N225 advanced 1.4 percent, buoyed by data showing the country's exports rose for the first time in 15 months in December, a positive sign for the economy even as talk of U.S. protectionism looms over the outlook.

Trump signed two executive orders on Tuesday to move forward with construction of the Keystone XL and Dakota Access oil pipelines, rolling back key Obama administration environmental actions in favour of expanding energy infrastructure.

He also met chief executives of the Big Three U.S. automakers to push for more cars to be built in the United States.

"We are clearly seeing a pro-business administration that is minded to action," ETX Capital's Wilson said.

DOLLAR DOWN

Global bond yields rose as Trump shifted his focus back to growth initiatives including promising corporate tax breaks to fuel U.S. investment, after focusing on protectionism in his first few days in office.

The 10-year yield US10YT=RR inched up to 2.48 percent, recovering from its dip below 2.40 percent earlier in the week, while the two-year yield held firm at 1.23 percent. It was as low as 1.14 percent on Monday.

European yields rose further. Germany's 10-year Bund yield hit a six-week high of 0.38 percent and France's benchmark 10-year yield hit a one-year high of 0.95 percent, with bond prices weighed down by the rally in stocks and new debt supply.

In currencies, the dollar failed to carry on its upward momentum from Tuesday.

Lingering concerns about growing protectionism and the potential negative effects on global trade and growth remained close to the surface. In this environment, the outlook for the Federal Reserve is murky.

"So far this year the tone of U.S. economic data has been adequate but not sufficiently strong to suggest that the Fed need to move away from the cautiously optimistic sentiments expressed by (chair Janet) Yellen last week," Rabobank analysts wrote in a note.

"Since so little is currently known about the detail of Trump's policy we would expect the (Fed) to be reluctant to act at least until the outlook becomes clearer," they added.

The dollar fell 0.5 percent to 113.15 yen, and 0.4 percent against a basket of currencies .DXY. The euro was up at $1.0760 EUR=, shrugging off a surprised fall in German business morale this month

Sterling rose 0.6 percent to $1.2595 GBP=D4, the day after Britain's Supreme Court ruled that the government would need approval from parliament before formally triggering the country's departure from the European Union.

She also announced a White Paper on Brexit, a document sought by many in Parliament that will lay out the leaving policy.

The court decision overall was seen as clearing the way for Prime Minister Theresa May to get on with launching Brexit talks. Sterling has bounced 4 percent over the last week.

Wednesday, 25 January 2017

Asian stocks edged up but the dollar eased as growing uncertainty over U.S. President Donald Trump's policies prompted some investors to take profits on the greenback's overnight bounce.

European markets looked set to echo the uneasy mood in Asia, with key benchmarks expected to open little changed.

In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.1 percent to its highest levels since late Octobe

Japan's Nikkei advanced 1.3 percent, buoyed by data showing the country's exports rose for the first time in 15 months in December, a positive sign for the economy even as U.S. protectionism looms over the outlook.

Though the S&P 500 and Nasdaq set records on Tuesday in a broad rally led by financial and technology stocks, some investors are turning cautious on Wall Street as market valuations are starting to look stretched by some measures.

“When you compare what’s happening in this part of the world to the rest, maybe that discount isn’t so justified as it has been in the past,” said Tim Orchard, chief investment officer Asia ex-Japan at Fidelity International, referring to the traditional valuation discount that Asia trades at to the developed world.

Fidelity has about $279 billion in assets under management

The S&P 500 is trading at about 17 times forward 12-month earnings, compared with the 10-year median of 14.2 while the MSCI Asia-ex Japan index is trading bang in line with long term averages, according to Thomson Reuters Datastream.

RAZOR'S EDGE

The dollar snapped its recent losing streak and Treasury yields firmed on Tuesday as Trump shifted his focus back to growth initiatives including promising corporate tax breaks to fuel U.S. investment, after focusing on protectionism in his first few days in office. and

But the greenback drifted lower against a basket of its trade-weighted rivals on Wednesday on lingering concerns about growing protectionism.

"While some calm has come over the foreign exchange market in the past 18 hours, dealers are on a razor's edge," said Stephen Innes, senior trader at online FX platform OANDA in Singapore.

Sterling added to overnight gains and was trading at 1.2524 per dollar after Britain's Supreme Court ruled that the government would need approval from Britain's parliament before formally triggering the country's departure from the European Union.

The decision overall was seen as clearing the way for Prime Minister Theresa May to get on with launching Brexit talks. Sterling has bounced 4 percent over the last week.

Sterling fell and London's FTSE 100 index rose on Tuesday after the Supreme Court ruled that the government must go through parliament, but not the UK's regional assemblies, to trigger talks on leaving the European Union.

The pound jumped to five-week highs after the first sections of the ruling were read, but was then hit by a wave of profit-taking, fuelled partly by investor worries about how politicians and the public in Northern Ireland and Scotland will respond.

The decision overall was seen as clearing the way for Prime Minister Theresa May to get on with launching Brexit talks which investors would rather were not taking place at all, albeit with a handful of procedural hurdles.

"There was the issue of the assemblies and it is a big deal (that they do not have to be consulted). It gives the upper hand to the government," said Stephen Gallo, head of European FX strategy with BMO in London.

"It looks like she will have enough votes to get it (triggering Article 50 divorce talks) through."

There were also hints of more constitutional conflict that could come back to haunt the pound, already down 17 percent against the dollar since June's referendum vote to leave the EU.

Scotland's nationalist First Minister Nicola Sturgeon said she would bring a motion of consent to Edinburgh's devolved chamber despite the ruling that the government did not need to ask for its approval, or that of the Northern Irish equivalent. Voters in both regions rejected Brexit, which was carried to a narrow majority by English and Welsh votes.

Sterling had drawn support last year from the original ruling in London's High Court which was perceived to support pro-EU forces in parliament who are demanding a "softer" Brexit that maintains membership of the bloc's lucrative single market.

But many market participants said the decision on Tuesday had already been factored into sterling.

"The ‘good’ news about greater Parliamentary scrutiny of the Brexit process had already been priced in," said City Index analyst Kathleen Brooks. "Thus, profit taking was to be expected at this stage."

By 1553, sterling was down 0.4 percent to $1.2489. and 86.07 pence per euro.

DATA DRIVE

The pound has fallen from $1.70 in a series of Brexit-driven sell-offs and partial corrections over the past 13 months, and there are many analysts and investors calling for more losses.

Mike Amey, sterling portfolio manager with giant bond investor Pimco, argues the UK economy, which has proved more robust than many economists had expected so far, will weaken in the months ahead.

"Our view is that the pound could still see some further weakness, probably more against the dollar than the euro," he told Reuters Global Markets Forum after the decision on Tuesday.

"We will see a slowdown over 2017. The good news is that the economy has entered 2017 with good momentum. Our base case is that consumer spending slows, but that GDP still holds (at) around 1-1.5 percent over 2017."

Bank of America Merrill Lynch analysts pointed to a profit warning from BT as a hint of how Brexit uncertainty is likely already weighing on business investment decisions and consumer confidence.

Falls for the pound have tended to support internationally-focused companies on London's FTSE 100, which become more competitive and profitable as the currency weakens. That index rose 0.2 percent on the day to 7163.51.

"The court ruling is a slap on the face of the British government," said Jawaid Afsar, senior trader at Securequity.

"However, parliament is likely to give its approval and the Brexit timeline could remain on track. As far as investors are concerned, one more uncertainty is now out of the way and they can focus on other things."

Tuesday, 24 January 2017

The dollar struggled in Asia on Tuesday as U.S. President Donald Trump's focus on protectionism ahead of fiscal stimulus fueled suspicions his administration might be content to gain a competitive advantage through a weaker currency.

The talk of trade wars came even as more data pointed to a welcome revival in activity worldwide. A survey of Japanese manufacturing out Tuesday showed the fastest expansion in almost three years as export orders surged.

Spread betters pointed to a hesitant opening for European bourses while E-mini futures for the S&P 500 were a fraction softer.

Sentiment took an early knock when U.S. Treasury Secretary nominee Steven Mnuchin told senators that he would work to combat currency manipulation but would not give a clear answer on whether he views China as manipulating its yuan.

In written answers to a Senate Finance Committee, Mnuchin also reportedly said an excessively strong dollar could be negative in the short term.

The dollar duly skidded as far as 112.52, breaking last week's trough and the lowest since late November, before steadying at 112.86. Its 1.7 percent loss on Monday was the largest since July 29.

Against a basket of currencies, the dollar index was down 0.1 percent at 100.080, while the euro hopped up to $1.0756. Both were levels last seen in early December.

Sterling briefly hit a six-week peak at $1.2546 on speculation that Britain's Supreme Court would rule on Tuesday that the government needs parliamentary approval to trigger formal Brexit talks.

While Trump promised huge cuts in taxes and regulations on Monday, he also formally withdrew from the Trans-Pacific Partnership (TPP) trade deal and talked of border tariffs.

"It's interesting that markets did not respond positively to a reaffirmation of lower taxes and looser regulation, reinforcing the impression that all the good news is discounted for now," wrote analysts at ANZ in a note.

"As week one in office gets underway, there is a growing sense of scepticism, not helped by the tone of Friday's inaugural address and subsequent spat with the media."

Doubts about exactly how much fiscal stimulus might be forthcoming helped Treasuries rally. Yields on 10-year notes eased to 2.39 percent, having enjoyed the steepest single-day drop since Jan. 5 on Monday.

Two-year yields were at 1.16 percent, narrowing the dollar's premium over the euro to 183 basis points from a recent top of 207 basis points.

Wall Street lost just a little of its recent gains. The Dow Jones fell 0.14 percent, while the S&P 500 .SPX lost 0.27 percent and the Nasdaq 0.04 percent.

Shares in Qualcomm Inc dived almost 13 percent after it was sued by Apple on Friday.

The drop in the dollar boosted industrial metals including copper and iron ore, while gold was near two-month high at $1,216.65 an ounce.

Oil prices lagged as signs of a strong recovery in U.S. drilling largely overshadowed news that OPEC and non-OPEC producers were on track to meet output reduction goals.

The Bank of England will leave its record-low interest rates and other stimulus measures unchanged at least until 2019, even though it is likely to revise up its 2017 growth predictions again next week, a Reuters poll found on Monday.

All but one of the 67 economists polled by Reuters in the last few days said the Bank would keep its policy unchanged when it announces the outcome of the latest meeting of its rate-setters on Feb. 2.

After Britain voted last June to leave the European Union, the Bank cut borrowing costs to a record low of 0.25 percent and restarted its quantitative easing program as it responded to initial signs that the economy was slowing sharply.

But the economy has so far fared much better than feared, and two-thirds of the respondents in the Reuters poll said the Bank would raise its growth forecasts again in its latest Quarterly Inflation Report. The others said they would be left unaltered.

In November, the Bank made its biggest ever forecast upgrade when it raised its expectation for British economic growth in 2017 to 1.4 percent from the previous 0.8 percent made in August, although it lowered its forecasts for 2018 and 2019 on higher inflation and weaker business investment.

"In normal times, the current data might point to a rate rise in the UK but times are not normal, and the bar for a hike is high," said Liz Martins at HSBC.

The poll gave only a median 20 percent chance of borrowing costs increasing this year and just a 15 percent likelihood they'll fall, the poll found. The highest chance of a hike given by anyone was 70 percent and the highest of a cut was 60 percent.

Few expected any change to the Bank's target of holding 435 billion pounds of British government bonds and 10 billion pounds of corporate bonds before the end of December 2018, the forecast horizon. Three thought the size of the bond-buying programs would be raised and one said they would be cut.

Fifteen of 31 respondents said the Bank would raise its forecast for inflation over the next two years. It has already begun to climb following the pound's slump and rising oil prices. Twelve said the inflation forecast would be unchanged and four said it would be lowered.

"Inflation forecast likely to be revised up as sterling depreciation effects come through more quickly than previously expected," said Stephen Lewis at ADM Investor Services.

June's shock EU referendum result wiped as much as 20 percent off the pound's value GBP= against the U.S. dollar.

A Reuters poll last week predicted Britain's economy would grow 1.2 percent this year and 1.3 percent in 2018. It also said inflation would be 2.5 percent this year and next.

Monday, 23 January 2017

The dollar skidded in Asian trade on Monday, with the euro hitting its highest levels in more than a month as investors locked in gains on the greenback's recent rise as they waited for U.S. President Donald Trump to offer details of his promised stimulus.

The euro firmed 0.4 percent on the day to $1.07400 after earlier rising to $1.07460, its highest since Dec. 8.

That helped push down the dollar against a currency basket, with the dollar index down 0.4 percent on the day to 100.37.

"The dollar is being sold off pretty aggressively, with the euro at the highs. It's across-the-board dollar selling, not just the risk on/risk off trade," said Bart Wakabayashi, head of Hong Kong FX sales at State Street Global Markets.

"It seems to be driven by uncertainty right now, and Trump's inauguration speech has led the way there," he said.

After a sharp rally following Trump's November election that propelled it 3 percent higher for the month, the dollar gave up some of those gains against a backdrop of uncertainty surrounding the new president's policies, as well as his recent remarks about the impact of dollar strength.

Trump's first address as president on Friday highlighted his "America first" policies that were short on specific proposals, and disappointed investors hoping for details on his plans to stoke growth, spend on infrastructure and reduce taxes.

His inauguration was followed a day later by coordinated protests in U.S. cities that attracted hundreds of thousands of demonstrators.

Trump said on Sunday he plans to hold talks soon with the leaders of Canada and Mexico to begin renegotiating the North American Free Trade Agreement, and his administration has also said it intends to withdraw from the Trans-Pacific Partnership (TPP) trade pact.

Against the perceived safe-haven yen, the dollar slumped 1 percent to 113.55, moving back toward last week's seven-week nadir of 112.57 yen.

"Trump hasn't said anything new and hasn't done anything yet, so people wait and see," said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo. "We have to see what kind of policies he actually follows."

Asian forex trading this week is likely to be subdued as some investors prepare for the long Lunar New Year holiday, he added.

Data from the Commodity Futures Trading Commission released on Friday and calculations by Reuters showed that speculators reduced long bets on the U.S. dollar for a second straight week through Jan. 17.

"When Donald Trump won the U.S. presidential election, markets were thrilled at the victory and its clearing of a path to fiscal stimulus alongside transformative tax, trade and infrastructure policies," Morgan Stanley strategists said in a note.

"As Trump took the oath of office, we transitioned from the thrill of victory to the difficulty of governing," they said.

In an interview with the Wall Street Journal earlier this month, Trump said that U.S. companies "can't compete with (China) now because our currency is strong and it's killing us."

Other signs emerged that investors feared the downside of a strong dollar. A Reuters poll published on Monday showed Japanese companies believe that neither Trump nor Japanese Prime Minister Shinzo Abe want to see the yen weaken significantly, a development they worry could spark an unwelcome political backlash.

In the monthly poll of 531 big and mid-sized companies 73 percent of respondents said Trump would not tolerate the dollar rising beyond 120 yen, and 90 percent saw 125 yen as a red line.

U.S. President Donald Trump's administration was only hours old, but already a small parade of S&P 500 companies' chiefs have voiced optimism that his promised tax cuts, stimulus spending and deregulation will boost corporate profits.

In the days ahead of Friday's inauguration, senior executives from Morgan Stanley, Delta Air Lines and other major U.S. corporations said the Trump White House has already sparked a brighter outlook for business.

"There is certainly more reason to be optimistic as we enter 2017 than there was at the beginning of 2016," Morgan Stanley CEO James Gorman said on Tuesday after his bank said profit doubled in the fourth quarter. He pointed to factors including a surge in consumer confidence after the Nov. 8 election and lower taxes promised by Trump.

Just under way, fourth-quarter earnings reporting season is providing a glimpse of what major large companies expect under Trump, and their take is largely positive so far.

With corporate earnings already on the mend after a slump in oil prices and a strong dollar last year, S&P 500 companies are expected on average to grow their earnings by 6.3 percent in the December quarter and 13.6 percent in the March quarter, according to Thomson Reuters.

Since the November election, the S&P 500 has rallied 6 percent to record highs, in part due to expectations Trump will pass policies that stimulate the economy. Banks have led gains, with investors betting Trump will roll back regulations passed by President Barack Obama following the 2008 financial crisis, which many investors say went too far.

After United Continental Holdings on Tuesday posted lower December-quarter profits, airline President Scott Kirby told analysts on a call, "It feels like we are on a really good path. It felt to me like there was an inflection point after the election for business demand."

An also upbeat Delta Air Lines Chief Executive Ed Bastian told analysts this month that he was excited about potential infrastructure spending promised by Trump, as well as a chance to make his case about unfair competition from Middle Eastern airlines heavily subsidized by governments.

Vince Delie, Chief Executive of F.N.B., which own First National Bank, said on a quarterly conference call on Thursday that he was saw more confidence among commercial customers and a potential pickup in lending.

Not everyone is over the moon, however. Kansas City Southern's CEO bemoaned an uncertain environment on Friday after the cross-border railroad reported lower quarterly profits, hurt by a slump in Mexico's peso since Trump's election.

"Obviously the political and economic uncertainty is probably first and foremost on most of our minds, and the irony of us reporting earnings on the Inauguration Day of the 45th President is not entirely lost on us," Chief Executive Patrick Ottensmeyer told analysts.

Indeed, some business leaders and lobbyists in Washington who were initially enthusiastic about Trump's victory have begun to exhibit some hesitance over his agenda amid confusing messages on healthcare, taxes and trade.

SURGING CONFIDENCE

Still, while Trump's views on immigration and a range of other issues are at odd with many Americans, most small businesses and consumers do see a brighter future as he launches his presidency.

An index of small business confidence in December hit a 12-year high, according to the National Federation of Independent Business.

The U.S. consumer confidence index in December hit its highest level since August 2001, a month before the Sept. 11 attacks.

Following strong stock gains in November and December, many on Wall Street are concerned that Trump may fail to deliver on all of his promises. A Republican-controlled Congress might balk at infrastructure spending or tax reductions that significantly widen the federal budget deficit.

Other investors worry that Trump could follow through on campaign-trail threats to tear up global trade deals and crack down on illegal immigrants from Mexico who provide low-wage labor in agriculture, restaurants and other industries.

"Folks are potentially underestimating the degree to which Trump is serious about real reform on trade an immigration," warned Jon Adams, senior investment strategist at BMO Global Asset Management. "Investors, in general, are hopeful Trump will take a more pragmatic approach on those issues."

Over the past two months, Trump has publicly targeted and threatened a range of multinationals, including Ford Motor, General Motors, Boeing Co and Lockheed Martin. That may have left CEOs wary of publicly disagreeing with his policies.

"You don't want to step on a mine. So the best course of action is to be somewhat optimistic, positive but also somewhat noncommittal so you're not trapped one way or another," said Robert Pavlik, chief market strategist at Boston Private Wealth in New York.

Trump's frequent use of Twitter to single out companies for criticism or praise has created volatile spikes in trading of their shares, which is good for online brokers including Charles Schwab and TD Ameritrade

"Each time, it's a new market event and a potential trading opportunity for our clients. Like everyone else, we're watching it with interest," TD Ameritrade Director of Finance Jeff Goeser said on a conference call on Wednesday after the company reported an increase in quarterly profits.

European markets were headed for a subdued start amid trepidation over Trump's first speech as president. Financial spreadbetter CMC Markets expected Britain's FTSE 100 to open 0.1 percent higher, and Germany's DAX and France's CAC 40 to start the day little changed.

MSCI's broadest index of Asia-Pacific shares outside Japan retreated 0.2 percent, and looked set to end the week flat.

"It makes sense for China to tolerate a growth moderation in the coming year, while leaving more flexibility to structural reforms," he said, adding he expects China to lower its growth target to around 6.5 percent.

The dollar inched down after Federal Reserve Chair Janet Yellen said that gradual monetary adjustments were prudent, although she warned against letting the economy run hot.

Her statement was seen as slightly less aggressive than a Wednesday speech in which she cautioned that waiting too long to raise rates could lead to "too much inflation, financial instability, or both," amid comments by other Fed officials that also favoured faster hikes.

The dollar index, which tracks it against a basket of six major global peers, pulled back 0.2 percent to 100.97 on Friday. On Thursday, it initially surged on upbeat U.S. data pointing to brightening economic prospects, before closing 0.2 percent higher as concern about Trump's policies returned.

The greenback slipped 0.2 percent to 114.64 yen.

U.S. homebuilding rebounded sharply in December amid stronger demand for rental housing, and the number of Americans filing for unemployment benefits fell to near the 43-year low touched in mid-November.

"The dollar could fall if Trump pushes forward his protectionist rhetoric in his inauguration speech," said Minori Uchida, chief FX analyst at Bank of Tokyo Mitsubishi UFJ. "Some investors also expect more details on his policies, so the dollar could also slip if Trump does not mention any specifics."

The 10-year U.S. Treasury yield fell 0.4 percent to 2.4613, after spiking to a 2 1/2 week high of 2.496 on Thursday.

U.S. stocks were also restrained overnight, with the major indexes posting losses of as much as 0.4 percent, and the Dow Jones Industrial Average down for its fourth straight session.

The euro rose on Friday, extending gains following initial losses after European Central Bank chief Mario Draghi played down a recent rise in euro zone inflation, as investors parsed his statement and noted no changes to policy.

The common currency advanced 0.2 percent on Friday to $1.068 .

In commodities, oil rose on expectations of tighter supply and reports of record Chinese demand, but the gains were tempered by concerns about swelling U.S. inventories.

U.S. crude added 0.3 percent to $51.53 per barrel, pulling further away from Wednesday's one-week low. But it remains down 1.6 percent for the week.

Amid nervousness about Trump's presidency, investors took shelter in gold. Spot gold extended gains 0.2 percent to $1,207.06 an ounce, set for a weekly increase of 0.7 percent, its fourth straight week of gains.

The dollar rebounded, Asian shares slipped and government bond yields soared to multi-week highs on Thursday after U.S. central bank chief Janet Yellen signaled a path of steady interest rate increases for the world's largest economy.

The European Central Bank was set to meet as the euro recovered some of the ground it lost overnight, but with no policy changes expected. However, hints of disagreements among the region's monetary guardians could ruffle markets.

European stocks opened a tad higher with some big moves in single stocks, as Zodiac Aerospace surged following a takeover offer, and Moneysupermarket.com jumped after it reported strong results.

Asian shares .MIAPJ0000PUS edged down 0.2 percent, knocked back by the dollar. The U.S. currency recovered from some of the weakest levels seen since early December after President-elect Donald Trump expressed concern in a weekend interview about the effects of a stronger greenback.

Yellen will speak again later on Thursday, after European markets close, about the economic outlook and monetary policy.

"Of all the speakers we're getting, either from Davos or from less ostentatious spots, the one I'm going to listen to most for now will probably still be Janet Yellen," Societe Generale's currency strategist Kit Juckes said.

"As the U.S. economy approaches full employment, as wages rise but inflation rises nearly as quickly, how hawkish the Fed dares to be will determine how much the dollar rises."

The dollar gained almost one percent from Thursday's lows against a basket of currencies .DXY after Yellen's comments that she and other policymakers expected to raise rates a few times a year until 2019.

The affects appeared to be wearing off on Thursday, though, as investors, desperate for further details on Trump's plans to boost growth, remained cautious before the President-elect's inauguration on Friday.

Euro zone government bonds were still moving in the slipstream of Yellen's speech with benchmark German bond yields spiking to one-month highs after U.S. equivalents rose to their highest since Jan. 9.

OIL REBOUND

Earlier in Asia, short-term funding costs in China shot to their highest in nearly 10 years on fears that liquidity was tightening heading into the Lunar New Year holidays at the end of this month.

"The market is typically short of liquidity ahead of the Lunar New Year," said Gu Weiyong, chief investment officer at bond-focused hedge fund Ucom Investment Co, adding that a cash injection by the central bank was insufficient.

The pound rebounded above $1.23 on Thursday after a wild few Brexit-fueled days that has seen both its biggest rise in decades against the dollar and two of its heaviest slumps in months.

Crude oil prices regained some ground lost in the previous session when the dollar strengthened as investors turned their attention to upcoming government data on U.S. inventories. A stronger dollar makes dollar-denominated commodities more expensive for those holding other currencies.

"Stock markets on both sides of the Atlantic continue to trade in a cautious fashion this week, with politics just as much a driver as the economics with European markets recovering from their Tuesday sell-off, and U.S. markets closing mixed," CMC Markets chief market analyst Michael Hewson said in a note.

The dollar had been grinding lower in recent sessions, and marked its weakest levels since early December after U.S. President-elect Donald Trump expressed concerns about the effects of a stronger greenback in a weekend interview.

Investors remained anxious ahead of Trump's inauguration on Friday, with many using the event as an excuse to lock in gains on their positions.

In a speech on Wednesday to the Commonwealth Club of California in San Francisco, Yellen said that holding off too long to begin raising rates could "risk a nasty surprise down the road," and that it "makes sense" for the Fed to gradually lift rates.

Short-term funding costs in China shot to their highest in nearly 10 years on fears that liquidity was tightening sharply heading into the long Lunar New Year holidays at the end of this month.

"The market is typically short of liquidity ahead of the Lunar New Year," said Gu Weiyong, chief investment officer at bond-focused hedge fund Ucom Investment Co, adding that a cash injection by the central bank was insufficient.

"The dollar clearly rose on Yellen's remarks," said Mitsuo Imaizumi, chief currency strategist at Daiwa Securities in Tokyo, who noted Japanese investors remained cautious ahead of Trump's inauguration.

While traders expect the incoming U.S. administration to adopt stimulus policies to lift growth and inflation and keep the Fed on course for rate hikes, many investors worry about the potential fallout of Trump's protectionist policies.

The dollar index .DXY, which tracks the greenback against a basket of six major counterparts, rose 0.3 percent to 101.22.

The dollar gave up early session gains against the yen and inched down to 114.58 JPY=, but stayed well above the previous session's low of 112.57 yen.

Sterling was 0.1 percent higher, at $1.2279 , after it shed more than 1 percent on Wednesday. The pound had surged 3 percent on Tuesday after British Prime Minister Theresa May's speech reassured investors worried about a "hard Brexit".

The euro firmed 0.1 percent on the day to $1.0642 ahead of the European Central Bank's regular policy meeting later in the session. The ECB surprised markets last month by saying it would trim monthly bond purchases in April.

None of the economists polled by Reuters last week expected any change at Thursday's meeting. They were unanimous in saying that the ECB's next move, after April's planned cut, would be to further taper its quantitative easing.

Crude oil prices regained some ground lost in the previous session when the dollar strengthened, with investors turning their attention to upcoming government data on U.S. inventories. A stronger dollar makes dollar-denominated commodities more expensive for holders of other currencies.

The dollar took a breather on Wednesday after falling to a seven-week low against the yen as investors await Federal Reserve Chair Janet Yellen's speech on monetary policy, while sterling gave back some of the previous session's rally.

The greenback added 0.4 percent to 113.05 yen , after hitting a seven-week low of 112.57 yen. The yen had strengthened for seven straight sessions.

The dollar index, which measures it against a basket of six major peers, last stood at 100.50, up 0.2 percent, after falling to 100.26 on Tuesday, its lowest since Dec. 8.

The euro slipped 0.2 percent to $1.06970 , after it hit a high of $1.07195 on Tuesday, its highest since Dec. 8.

Yellen's speech later on Wednesday, to the Commonwealth Club in San Francisco, could offer clues about the direction of policy.

San Francisco Federal Reserve Bank President John Williams on Tuesday said he sees a "good case" for three rate hikes this year even without any fiscal stimulus, but if the economy accelerates, the Fed would need to raise rates faster.

Fed Governor Lael Brainard on Tuesday joined the growing chorus of policymakers at the Fed warning that sustained wider budget deficits could fuel inflation.

Investors also awaited the U.S. consumer price index due later on Wednesday. According to a Reuters survey of economists, the CPI probably advanced 0.3 percent last month after gaining 0.2 percent in November.

Sterling slipped 0.6 percent to $1.2341, a day after posting its biggest one-day percentage gain since at least 1998 after British Prime Minister Theresa May outlined her 'Brexit' plans.

May pledged to hold a parliamentary vote on whatever deal Britain eventually reaches to leave the European Union. As expected, May said Britain will pull out of the EU's single market when it exits the bloc and not look for a compromise deal to retain some of its benefits.

Sterling rose by about 3 percent against the dollar on Tuesday, touching $1.2416, its highest level in nearly two weeks.

However, some analysts say much of pound's gain was due to the dollar's broader fall.

"Markets cannot be too optimistic about the UK parliament having the final vote. Brexit, hard or not, will weigh on the UK economy," said Masashi Murata, currency strategist at Brown Brothers Harriman.

"The pound is still on a downward trend according to the technical analysis, compared to the highs marked in September and December last year," Murata added. The sterling marked highs of $1.3445 in September and $1.2775 in December 2016.

On Tuesday, a sell-off in the dollar had deepened as U.S. traders returned from a long weekend after Martin Luther King Jr Day and reacted to President-elect Donald Trump's weekend comments. In an interview with the Wall Street Journal, Trump said U.S. companies "can't compete with (China) now because our currency is strong and it's killing us."

The dollar had surged at the end of 2016 on expectations that Trump's proposed fiscal stimulus would boost growth and inflation. But on the other hand, Trump has also continued to strike a harsh tone toward Beijing, and his protectionist rhetoric is beginning to play a larger role in investors' expectations.

A senior adviser to Trump also warned on Tuesday about the risk from a stronger dollar. Anthony Scaramucci of Skybridge Capital said "we need to be careful about the rising currency" at the World Economic Forum in Davos.

Junya Tanase, chief forex strategist at J.P. Morgan in Tokyo, said "If the U.S. government officials further talk down the dollar, the greenback could weaken and the correlation to the interest rate differentials may end."

Higher U.S. Treasury yields had fuelled demand for the dollar relative to currencies such as the euro and yen.

Wednesday, 18 January 2017

Asian stock markets stabilized near three-month highs on Wednesday, helped by Hong Kong and Chinese shares, as investors judged U.S. President-elect Donald Trump's concerns over a stronger dollar to be beneficial to some of the regional bourses.

Short-covering also helped, especially in China .SSEC, which tumbled more than 4 percent last week, as traders took some money off the table before Trump's inauguration on Friday.

In Asia, MSCI's ex-Japan Asia-Pacific shares index rose 0.4 percent, just shy of a three-month high hit last Thursday. Energy and cyclicals were the chief gainers.

The firmness in Asia is expected to extend to Europe with stock futures in key European markets pointing to a higher start.

"Trump's comments on the dollar has helped relieve downward pressure on the renminbi and on Chinese equities and we have seen a steady pick up in capital flows from mainland investors into Hong Kong stocks," said Alex Wong, a portfolio manager at Ample Capital with $100 million in assets under management.

By midday, Hong Kong stocks poked above a key resistance level around 23,000 which if successfully breached would position the market for further gains, according to analysts.

While investors have become somewhat optimistic on the outlook for Asian equities in the past two weeks - prompting regional markets to outperform developed market peers, underlying caution remains due to China concerns.

Gene Frieda, a portfolio manager at bond giant PIMCO, wrote in a note that though Chinese economic growth looked stable into early 2017, a more marked slowdown by the second quarter "appears inevitable" amid the backdrop of ever-increasing debt.

In currency markets, the British pound consolidated gains on Wednesday after posting its biggest rise in nearly two decades in the previous session.

Sterling's GBP=D4 rally was triggered after Prime Minister Theresa May promised a parliamentary vote on Britain's deal to leave the EU and sought to draw a line under discussion of a "hard" or "soft" Brexit.

It was trading at 1.2331 against the dollar, giving back some of its near 3 percent gains scored in the previous session. That was the biggest climb since 1998, according to Thomson Reuters data..

"Markets cannot be too optimistic about the UK parliament having the final vote. Brexit, hard or not, will weigh on the UK economy," said Masashi Murata, currency strategist at Brown Brothers Harriman.

The dollar's recent weakness deepened after President-elect Donald Trump said the greenback's strength against the Chinese yuan "is killing us."

The dollar was trading at 100.62 against a broad trade-weighted basket of its peers and is down nearly 3.5 percent from a near 15-year peak of 103.82 hit on Jan. 3. Against the Japanese yen JPY= it was changing hands at 113.32

The dollar's renewed weakness put a floor under some Asian currencies which have been punished by investors such as the Chinese currency traded in the offshore market, and has helped attract flows into some markets like Korea.

With doubts growing about the sustainability of the "Trump trade" - higher stocks and stronger dollar - safe-haven assets glittered. Gold was perched comfortably at a two-month high above 1215 dollars per ounce. It is up nearly 8 percent in the last three weeks.

Bond markets also doubted Trump's stimulus policies with the spread between ten and two year U.S. debt - an indicator of interest rate expectations - tightening by around 20 basis points over the past month.

Oil prices were locked in a tight range, with benchmark Brent futures steady at $55.67 per barrel as a decline in the dollar offset forecasts that U.S. and Russian producers would boost output later this year.

Sterling saw its biggest gains since the 2008 financial crisis on Tuesday as Prime Minister Theresa May promised a parliamentary vote on Britain's deal to leave the EU and said it would seek to stay a key European partner.

The pound, already up more than 1 percent as May began a keenly-awaited speech that had been extensively leaked to media, surged 2.5 percent on the day to a 10-day high of $1.2343 in the minutes that followed.

It gained more than 1.5 percent to 86.69 pence per euro, with dealers reporting a widespread squeeze on short positions - or bets against sterling - taken in derivatives markets in the past few days.

One media report at the weekend had quoted a Downing Street source as predicting May's speech would trigger a significant correction in the pound. Until Tuesday's action most had assumed that would be downward not upward.

"Theresa May’s greatest trick appears to have been to deliver what amounts to a fairly hard Brexit message without the markets going into a flat spin," said ETX Capital analyst Neil Wilson.

"Some judicious leaks in the last couple of days had primed investors for the UK to be leaving the single market. Many expected a tough sounding speech that would send the pound lower."

The FTSE 100 share index, which has tended to rise as sterling dropped in a series of sell-offs since the vote for Brexit last June, extended an early fall led by exporters and mining companies as May spoke.

May said she wanted to avoid a "disruptive cliff edge" for businesses when Britain leaves the European Union and backed a phasing-in of changes in immigration, customs and regulation in areas such as financial services.

Analysts and traders said they expected more meat once the talks get under way after Britain triggers the EU's Article 50 exit process in March.

"May’s speech did not have anything new that was not already known. However, with the pound bouncing, the dollar earners are coming under pressure," said Jawaid Afsar, a senior trader at broker Securequity.

"The speech has given some direction, but the real test will come when Article 50 is triggered. Stay tuned for a bumpy Brexit ride."

Gilt yields, which have been falling as expectations for future UK growth suffered from concerns over the EU exit talks, rose around 2 basis points to 1.275 percent for 10-year paper.

"There was a lot of bad news in the market – people were positioned all one way, so there was always a risk (of a squeeze on those positions)," said Ian Gunner, a portfolio manager with Altana in London.

"Some people will say 'this is a hard Brexit, however she wants to dress it up', and there will be criticisms from various politicians. But it’s a clean Brexit, and that’s the most important thing."